If the trend is your friend, there’s little reason not to like Facebook Inc (NASDAQ:FB). But considering an extended run in FB stock and the broader market, liking shares at a discount using a no-cost, limited risk spread makes more sense for less right now. Let me explain.
I’ve said it once and I’ll say it again, “not much has changed for Facebook” since late February when this strategist covered the tech giant. Actually, that’s not entirely true. Nor is it true for FB stock.
Over the past couple week’s social media competitor, well kinda, sorta, Snap Inc (NYSE:SNAP) has gone public. At the same time, buzz of Zuck’s future in politics has cooled a bit and hoodies have been spied being worn back in the Bay Area.
Actually, the reference to Zuckerberg’s favorite article of clothing could be “fake news” manufactured by this writer. Having said that, whether there’s two “huge” developments with Facebook is up for debate…or not.
The real concern remains the undeniable optimism reflected in both FB stock, as well as the broader markets. Investors and probably some worn down bears, continue to seemingly support every piece of new information as more proof of alternative facts, that this time the bull is truly different.
FB Stock Daily Chart
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At the same time, the S&P 500 and Nasdaq Composite have done a little bit of the latter, but with much more modest gains of less than 0.5% and 1%, respectively.
Given the post-earnings narrowing price consolidation of twelve days that followed what I described as a post “fake news” bearish reaction; I optimistically respected and presented the bullish case for shorter-term traders.
In the here and now, the trend in FB stock remains firmly up. That’s especially true in the context of the last month where rotational favor has supported shares. Now for the bad news. It’s our unsubstantiated view that while trends can persist for longer than one thinks possible, I believe it’s time to like Facebook as a pullback candidate.
FB Stock Modified Put Butterfly Spread
In looking to buy FB stock on weakness within the existing trend, one way in which FB options traders can do this today is with a modified long put butterfly.
With Facebook shares at $139.95, the April $136/$134/$130 put butterfly is priced for even money. If shares of Facebook fail to fall by 2.8% and below $136 at expiration, the spread goes out worthless. The somewhat good news in this long spread expiring without value is the “tweaked” butterfly didn’t cost the FB trader any money. This is due to the varying widths of the embedded bear put and bull put spreads.
Even better news, prior to the third Friday in April, if shares of Facebook are near $136, a profit could be expected. In that type situation the embedded $136/$134 bear put spread will hold some value, while the lower bull put spread would essentially be priced as worthless.
Should FB stock manage to drop around 4.30% to $134 over the life of this FB options spread, the trader would be in position to realize a profit of $2. This is the result of the owned bear put spread expanding to its maximum value, while the sold (and wider) bull put spread expires worthless.
If shares of Facebook get really “unliked” by investors, the breakeven on this butterfly is $132 or 5.7% below today’s price. Below $130 is where some may want to unfriend Facebook with this strategy. That’s where a limited loss of $2 exists.
Bottom line, though, if you’re the type that likes buying on weakness, this outcome is going to be a whole lot more friendly looking.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
